Becoming A “Bad Investor”

I’m planning to rebalance at year-end, and I’m going to do something index purists might consider heresy: deliberately tilt away from the market’s weighting.

Lately, I’ve become increasingly uncomfortable with the portion of my portfolio devoted to the Magnificent Seven tech stocks, currently pushing towards 25%.

The index purist view would say that cap-weighted indices by definition represent the market’s collective wisdom about valuations. When the Magnificent Seven grows to nearly 25% of my developed world tracker, that’s the market telling me those companies have genuinely earned that weight through their size and success. Overriding this means I’m asserting that I’m a smart ass who knows better than Mr. Market.

Counter-intuitively, I really don’t think I know better. But having a quarter of my portfolio in seven companies—or really, one sector—does create vulnerability, regardless of how the market currently values them. This violates diversification principles that exist independently of index investing. And while markets are generally efficient, they’re not perfectly so. Momentum can create temporary distortions. The late 1990s tech bubble is the obvious historical parallel.

Neither choice is objectively “wrong.” The index purist approach has strong theoretical backing, but absolute adherence to it can sometimes conflict with prudent personal risk management for individual investors. Quite simply, I know my financial situation and don’t need the excess returns. I’m comfortable trading potential yield for greater diversification.

Although I’m being a “bad” indexer, I’m not abandoning the game. I’m simply going to allocate some of my capital to indices tracking the European and Asian markets and an overweight allocation to the UK market, bringing my “big seven” exposure down to 15%—a level I’m personally comfortable with.

This shift doesn’t have tax implications. These holdings are housed in tax-sheltered accounts, I can sell my winners and reallocate without triggering a capital gains bill. This allows me to focus purely on the math of risk and the psychology of sleep, rather than the hassle of taxes.

Am I going to give up some gains? Possibly. Am I going to underperform the index? Probably. Do I care? Not in the slightest. I’m past the stage where I need to squeeze every last basis point from my portfolio. What I need is resilience, not heroic returns. A good night’s sleep and the peace of mind that comes from genuine diversification—not having a quarter of my equity wealth tethered to seven companies in one sector—is worth far more to me than the possibility of outperformance.

In the end, I’d rather sleep soundly with 15% exposure than lose sleep worrying over 25%. Some might call this bad practice—I see it differently. It’s not about being a bad investor; it’s about knowing myself and what I’m actually investing for. So what do you think: am I being a “bad indexer,” or am I following a reasonable path of being a good “investor” because indexing and investing are definitely two separate philosophical propositions.